Today on episode 29 I want to welcome back to Clipping Chains writer, climber, father of five, and fellow personal finance geek, The Frugal Professor.
We cover it all on this one, from how the Frugal Professor was able to save nearly $2 million dollars with a family of seven, to how my wife and I are continuing to navigate a post-Financial Independence life.
Topics Discussed with the Frugal Professor
- How FP became what I call “the Hustler of Personal Finance,” where he regularly gives us the full frontal of personal finance transparency.
- How FP was able to build a net worth of nearly $2 million with a family of seven by age 40
- Saving tips for a large family
- A deep dive on the importance of understanding taxes
- Ways to minimize our lifetime tax burden while avoiding high healthcare costs
- How my wife and I funded our life in 2021 with near-zero income
- How much we paid in taxes in 2021
- Why one should be careful with the type of investments you place in a taxable brokerage account
- Early retirees and Medicaid. Is this legit?
- Musings on the “correct” portfolio withdrawal rate and not falling victim to “one more year syndrome”
- My thoughts on living in St. George, UT
- Advice to college students or recent grads
Frugal Professor Links
Frugal Professor Monthly Financial Updates
How to Pay ~$0 for Cell Phones
Clipping Chains Links
EP 5: Diana Crabtree Green: Pay Yourself First
EP 26: How to Spend Retirement Money Early (Roth Conversion Ladder)
How to Have Negative Health Insurance Costs
External Resources
Health Insurance Marketplace Calculator
Retirement Savings for the Self-Employed: Solo 401(k)
Early Retirement Now Safe Withdrawal Rate Series
Books
The Richest Man in Babylon (George S Clason)
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Burton G. Malkiel)
Common Sense on Mutual Funds (John Bogle)
Frugal Professor Interview Time Stamps
0:2:47: Interview begins
0:6:27: How FP became “the Hustler of Personal Finance” and the origins of his blog12
0:12:57: The importance of visuals and tracking
0:17:25: FP’s career and education pathway that led to a net worth of nearly $2 million by age 40
0:25:54: An outsider’s view of a simple life and the misperceptions on what wealth looks like
0:26:38: The security of financial independence
0:27:43: The timeline and expectations for the financial independence life for FP and his family
0:31:07: Why understanding taxes is so important
0:36:27: Structuring the CC Family taxes in a life of “early retirement.”
0:37:22: How we funded our life in 2021
0:41:00: What we paid in 2021 federal taxes and how/why we arrived at our level of investment income
0:47:25: More details on balancing healthcare costs and minimizing tax burden
0:54:16: Summary of the CC family income and tax situation in 2021
0:55:14: How much money can someone withdraw and pay $0 in federal taxes?
0:56:27: Takeaway points for saving effectively and minimizing tax obligation
0:58:15: Why one should be careful with the investments you place in a taxable brokerage account
1:02: 15: Which accounts to place “play money” stock picks.
1:05:07: Early retirees and Medicaid
1:07:22: The CC family healthcare insurance philosophy
1:09:56: Saving, healthcare, and tax considerations for contractors
1:15:17: Did we over-save and fall victim to “one more year syndrome?”
1:17:37: Discussion on appropriate safe withdrawal rates for a portfolio in retirement
1:23:37: Thoughts on life in St. George, UT
1:29:30: Saving tips for a large family
1:35:57: Personal finance advice to students or recent college grads
1:43:09: Recommended books and podcasts
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Overall, thought this was a great episode. One comment on the details of stock picking in tax-protected vs taxable account. First off, I agree stock picking should be avoided. However, the logic of stock picking in taxable vs tax protected that was presented in the episode has some flaws, I believe. Most of the time was spent on discussing changing legacy holdings with a capital gain, and yes, that is easier in a tax protected account.
However, the more likely scenario with stock picking is to underperform the market. In that case, you have wasted precious tax protected space on a suboptimal investment. For example, you foolishly invest a year’s worth of roth contributions ($6k) into the latest meme stock hoping to strike it big and shelter the gains from taxes. A couple years from the initial investment, you realize the error of your ways and decide to swap your holding, at a loss, for something more sensible (maybe value of that investment is now $4K). While you can swap holdings with ease in the tax protected account, you cannot make any catch up contribution to account for the $2k loss in tax protected space.
If however, you had made that same foolish investment in a taxable account, you could tax loss harvest up to $3K against that years ordinary income, carry that forward to future years to deduct from ordinary income, and/or use that to offset capital gains at any future date.
Yes, mistakes made with legacy holdings are easier to swap out in a tax protected account, but that comes at the high potential price of minimizing the total investment dollars in your tax protected account. For that reason, I would advocate that your most sensible investing should take place in tax protected accounts (especially if they are tax inefficient like total international funds, REITs, or non-municipal bond funds), and that if you choose to stock pick it should be done in taxable. If you strike it big, yes, you will have to pay taxes on the gains if you want to swap out holdings, but if you take a loss, you haven’t wasted valuable space in tax protected accounts where you cannot contribute to make up for the loss and you can tax loss harvest.
What are your thoughts?
Fair point. I guess the lesson is to avoid individual stock picking! But yes, the point about the valuable and limited space of tax-advantaged accounts is appreciated. Thanks for the note.